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SMSFs getting increasingly comfortable with crypto

SMSFs have now seen an over 90 per cent increase in cryptocurrency trading across the year, with advisers urged to start getting acquainted with crypto as it becomes a growing alternative asset for clients, according to a report.

The BTC Markets’ Investor Study Report 20-21 has unveiled the data analysis of the crypto exchange platform’s 325,000 users to explore the “what’s” and “why’s” of their crypto investments.

Findings from the report found that the growth of SMSFs trading on the BTCM exchange during FY20-21 rose by 95 per cent.

Based on the data, there has been increased demand from SMSF investors driving crypto investment in a rapidly maturing market.

“We have noticed that SMSF investors are comfortable making significant purchases outside of the more well-known cryptocurrencies into projects such as Ethereum Classic (ETC) and Bitcoin Satoshi Vision (BSV) – indicating their confidence and commitment to research,” BTC Markets CEO Caroline Bowler said.

“Further, companies that invest and trade with us are generally in the small to medium-sized enterprise category and are invariably organisations where the founder is still involved.

“This is interesting because founders and entrepreneurs usually have a healthy appetite for risk and tend to be nimbler when it comes to decision-making – a trait that is beneficial for investing in crypto given its dynamic nature.

This result also indicates a longer-term investment timeline whereby Australians are looking to cryptocurrency to build and provide for their future, rather than using it as a “get rich quick” investment, according to Ms Bowler.

“It’s worth noting that cryptocurrency investments are being used for overall portfolio diversification. This is a role traditionally held by alternative assets such as REITs, hedge funds, art, precious metals such as gold, and other collectibles,” she noted.

“This indicates that cryptocurrencies are coming of age in playing an increasingly important role as an alternative asset in the portfolio construction process.”

Looking forward, BTCM said it expects more companies to follow suit in adding digital assets to their balance sheets, whether as a natural hedge against fluctuating fiat currencies or as part of a corporate strategy to embrace modern, open technologies.

Ms Bowler believes there is a clear avenue for SMSF accountants, financial advisers, tax lawyers and to lift their game in getting acquainted with the nuances of crypto, not only for their own business but also for their clients.

Nearly a quarter (23 per cent) of investors surveyed cited cryptocurrency as the only investment they held and 63 per cent were not deterred by its volatility, rather embracing it as a “risk they understood.”

“In order to stay relevant to this investing cohort, it is time for professional services to catch up with the comfort levels of these investors, rather than waiting for them to be convinced of the benefits of more traditional investment assets,” she stated.

While financial advisers may be investing in digital assets in a personal capacity, regulation prevents them from supporting their clients who are doing the same, as cryptocurrency is not considered a financial product in Australia.

“This lack of professional financial advice can be conducive to investors falling prey to unscrupulous scams and ‘finfluencers’ if they don’t do their due diligence.

“Further building the case for regulation of cryptocurrency in Australia, 28 per cent of respondents said that a lack of regulation was a challenge when investing, while 32 per cent said a lack of understanding on the tax treatment of crypto investment was a hindrance.”

Once crypto becomes a regulated financial instrument, which is currently being addressed by Senator Andrew Bragg’s select committee, Ms Bowler said investors and their advisers would likely gain greater confidence about operating in the crypto sector.

“In the meantime, educating professional services will be crucial,” she concluded.

However, this comes as the ATO had recently fired warning shots for advisers new to cryptocurrencies to be aware of the components that comprise a crypto asset’s cost base, and to encourage their clients to keep immaculate records.

Speaking at a cryptocurrency forum hosted by the Knowledge Shop on Tuesday, ATO assistant commissioner Adam O’Grady stressed the importance of “getting the cost base right,” which he said has emerged as a leading pain point in the tax treatment of cryptocurrencies.

One often overlooked element of a crypto asset’s cost base, Mr O’Grady said, are instances where an investor has borrowed money to invest in cryptocurrency.

“Generally, that is actually part of the cost base,” he said. “Unlike shares that are earning dividends on the way, those interest expenses may be claimable immediately as a deduction in the cryptocurrency space.”

“Because they’re generally not earning income alone, it does actually form part of the cost base.

“But a lot of other cost base elements such as your brokerage fees, or transfer costs, all those sorts of things are ones that you’d be familiar with.”

Source: SMSF Adviser

ATO Quarterly Statistical Report

The ATO has released the June 2021 quarterly statistical report revealing the total estimated assets of SMSFs have reached just over $822 billion, along with a record growth trend in establishments seen across the year.

The ATO has released its Self-managed super fund quarterly statistical report – June 2021, revealing the latest statistics on the SMSF sector.

The report shows that there are now approximately 597,900 SMSFs and an estimated 1,114,529 members. These figures point to increased growth in total fund numbers, which have increased to 4 per cent from the last financial year, compared with the yearly average of around 2 per cent each year over the last five years.

The total estimated assets of SMSFs increased from $787 billion in the March 2021 quarter to just over $822 billion in June 2021. The top asset types held by SMSFs (by value) are listed shares (28 per cent of total estimated SMSF assets) and cash and term deposits (18 per cent). 

 

This 2020-21 financial year saw more than 25,312 new SMSF establishments showing continued growth compared with previous years, while wind-ups have also hit record lows with 2,187 recorded, around an 80 per cent drop from previous year averages. 

Fifty-three per cent of SMSF members are male and 47 per cent are female, while 86 per cent of all SMSF members are 45 years or older.

Individuals aged 35 to 44 continue to make up the majority of most of the new establishments and have now risen to 10.7 per cent in total age distribution of members in SMSFs as at the end of June 2021.

The average assets per SMSF member were $696,000 and the average assets per SMSF were $1.3 million. The median assets per member was around $414,912, while the median assets per SMSF had increased up to $733,926. 

Meanwhile, member contributions into SMSFs were up to $12.6 billion, while employer contributions into SMSFs were around $5.4 billion.

A more detailed overview of the ATO statistical report can be found here.

Source: SMSF Adviser

Timing opportunities to utilise shares as contributions for SMSFs

SMSFs may be able to utilise planning opportunities for shares through the in-specie contribution process and create a better tax environment for the fund position, according to a wealth adviser.

In a recent update, Creation Wealth director Andrew Zbik said that while the market volatility and uncertainty during the past year and a half of COVID-19 have many share investors understandably rattled.

However, this may present a smart opportunity for investors nearing retirement in the next five years.

“The benefits of this strategy are that you can continue to hold your shares and move the ownership of that holding into the superannuation environment which has a lower tax rate compared to many investors’ marginal tax rate,” Mr Zbik said.

“Plus, if the shares are being transferred at a price lower than what you paid for them there will be no capital gains tax payable.”

Most superannuants are able to draw an account-based pension from their superannuation fund tax free. However, Mr Zbik said the SMSFs needs to consider that making an in-specie transfer of shares from your own name to your superannuation fund is a capital gains event. This means that if you are transferring the shares at a higher value than what you purchased them you may need to pay capital gains tax.

“If you are transferring the shares at a loss, it means you will retain that loss on your tax return which can be used to offset future capital gains,” he noted.

“So, for some, it may be an opportune time to contribute these shares to your superannuation fund to allow future gains to be made in a concessional tax environment that is superannuation.”

Furthermore, funds must choose a date that the transfer is to take place, properly report the true value of the share on that day as your sale/purchase price and the share registry must be notified of this transfer within 28 days, according to Mr Zbik.

Transferring shares into superannuation will also most likely count towards your non-concessional contribution cap which is currently $110,000 for this financial year or $330,000 if you bring forward three years of contributions and you are aged under 67.

“Ultimately, one would only use this strategy if they anticipate to continue holding these shares for the long-term,” Mr Zbik explained.

“Most members of SMSFs will be able to use this strategy. Some retail superannuation funds will accept shares as an in-specie contribution. Unfortunately, most industry funds are not able to receive in-specie contributions of shares yet, but several are investigating this as an option in the future.”

Source: SMSF Adviser

SuperStream rollover events clarified

The ATO has released examples of rollover events to support SMSF trustees in adhering to the SuperStream rules set to take effect from 1 October.

In a website update, the regulator outlined the circumstances where a trustee or authorised agent will be required to process fund rollovers using the new service.

Family businesses within a fund will be among those not required to send contributions via SuperStream due to the link of ownership between the appropriate business and membership, which meets the related-party exemption.

However, funds that involve a self-employed member in a fund that also includes family members working for non-related employers will need to use SuperStream to gain access to employer contributions.

SMSF members initiating a rollover request from an Australian Prudential Regulation Authority fund will need to request the transfer using the service from 1 October, as will trustees rolling out any member funds or winding up an SMSF after that date.

“From 1 October 2021, where your SMSF cannot interact via SuperStream, you cannot roll money out of your SMSF, including at wind up,” the ATO said.

It noted SuperStream will be a faster service for funds seeking to release excess contributions, but use of the service is not mandatory in this circumstance.

In addition, it warned funds to ensure their SMSF messaging provider allows SuperStream rollovers and to inform the ATO if they change providers.

In a separate update, the ATO stated all contributions made by a SuperStream rollover had to be reported during the financial year via the SMSF annual return and funds were also required to complete a transfer balance account report to report the debit that arises in the member’s transfer balance account if they commute a retirement-phase income stream before rolling over the assets.

Source: smsmagazine.com.au

SMSF trustees warned on increasing exposure to compliance risks affecting collectables

SMSFs can be increasingly exposed to various compliance risks surrounding collectables, as the asset class requires continued consideration of administrative impacts on the fund.

In a recent update, an SMSF expert said that, since 2016, when the full implementation of the restrictive rules surrounding SMSF investments in collectables commenced, there has been a marked reduction in the number of funds holding this class of investment.

“We are now seeing some increased exposure as trustees look for alternative investment options, but I suspect that many are not also considering the restrictions and ongoing administrative ramifications involved,” he said.

Collectables and personal-use assets include artwork, jewellery, antiques, artefacts, coins, stamps, books, memorabilia, wine, cars, bikes, recreational boats and club memberships. Bullion is not included as its value is based on intrinsic weight and purity.

Mr Busoli noted collectables can’t be leased or used by a related party or stored in a private residence of a related party. Funds can only lease them to unrelated parties, so the SMSF can lease artwork to an art gallery provided the gallery is not owned by a related party and the lease is on arm’s length terms.

“If the SMSF owns a vintage car, related parties can’t drive it for any reason — not even for maintenance purposes or to have restoration work done — because this constitutes use of the asset,” he explained.

“Storage must be remote from the trustee’s private residence which includes any part of the land on which it’s situated. So, a vintage car cannot be stored in a purpose-built shed, and a record must be kept of the reasons for deciding where to store the items.”

They must also be insured in the name of the fund. If they constitute only a part of a policy held by another party, they must be specified, and the fund must be noted as the owner and beneficiary. If the fund is unable to insure them appropriately, they must be disposed of.

“Collectables and personal-use assets can be sold to a related party provided the sale is at market price as determined by a qualified, independent valuer, which is a more onerous requirement than for other asset classes,” he explained.

“I suspect that trustees will be less inclined to want to participate in this class of investment when made aware of the rules.”

Source: SMSF Adviser

Covenant pointless for SMSFs?

The imposition of a retirement income strategy on SMSFs under a new covenant will not create any benefit to funds members, but rather generate further costs undermining the intent of the strategy, a legal firm has warned.

Townsend Business and Corporate Lawyers said the federal government’s proposal for every superannuation fund to have a retirement income strategy under the Retirement Income Covenant would be unsuitable for SMSFs, which were only likely to pay it lip service.

The legal firm made the claim in a submission to Treasury in response to a position paper released by Superannuation, Financial Services and the Digital Economy Minister Jane Hume.

The paper stated the covenant will impose a duty for super fund trustees to develop and document a strategy to assist retirement or near retirement age members to maximise their retirement income, manage risks to the sustainability and stability of their retirement income and to provide flexibility in accessing super savings during their retirement.

In claiming the covenant and strategy would not generate any practical benefit to SMSF members, the law firm pointed out limited retirement income options were available to an SMSF.

“The only retirement income stream product which can be issued by SMSFs are account-based pensions,” it said.

“The only means of increasing retirement income is to dial up the pace of capital consumption or the adoption of investment strategies involving greater investment returns at the cost of higher increased investment risk.

“There is no scope for augmenting pension capital by the trustee issuing some form of pooled income stream product – as the membership base of SMSFs is too small for pooled products.”

It added that because pooled retirement income products were unavailable to SMSFs, they operated in a different way to non-SMSFs in ensuring retirement income was sustainable over the long term.

“Longevity risk can only be managed by moderating the pension drawdown rate; investment risk can only be moderated by a weighting towards defensive assets as against growth assets; and selection risk can only be moderated by having a cash component sufficient to support one or two years’ pension payments,” it said.

“The member could purchase, from a third party, a lifetime income stream. However, this is a decision best left to the individual member and their willingness to accept the significant capital cost of such guarantees.

“Finally, it should be noted that the current regulatory design features of account-based pensions are at cross purposes with the sustainability and stability goal set out in the paper and, also, the retirement consumption pattern noted in the Retirement Income Review.

“The age-related and increasing minimum drawdown requirement undermines management of the longevity risk and the requirement to make pension payments in cash rather than in specie asset transfers increases both investment and selection risks.”

It said given these limitations with SMSFs, and the small size of the membership of most funds, there was no scale within the funds for the expense of implementing a strategy on each member’s retirement savings.

“Compliance with the RI (Retirement Income) Covenant will be formalistic at best and the regulator will be required to challenge the performance of the RI Covenant, which will be beyond the regulator’s resources and skills,” it added

Source: smsmagazine.com.au

SMSF Association urges rethink on NALE

The SMSF Association is urging the Federal Government and the Federal Treasury to review the non-arm’s length expenditure (NALE) rules following an ATO ruling handed down last week.

Peter Burgess, Association Deputy CEO/Director of Policy & Education, addressing the organisation’s Technical Summit, says the ATO ruling is the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019, which, “in our considered opinion, could have punitive consequences that we doubt are intended.”

“Today’s ruling confirms the ATO’s draft position that NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.

“This means situations could arise where an SMSF, which does not incur a general expense on arm’s length terms, would have all its income taxed as non-arm’s length income (NALI) – regardless, it would seem, of the monetary value of the service provided.

“Even though the ruling makes it clear the ATO does not consider the general expenditure issue to be a significant compliance risk that would warrant a particular focus, we urge the Government to review these provisions to avoid any undue concern or confusion.”

Mr Burgess acknowledges the underlying policy rationale of the NALE rules is to ensure all SMSF transactions occur on arm’s length terms.

“Although we accept the underlying policy intent, the penalty imposed on SMSF trustees who may not see the harm in entering arrangements with related parties on favourable terms to their SMSF, can be very significant and grossly disproportionate.”

On a positive note, the ruling does provide several examples of situations where the trustee provides a service to their own fund for no charge that does not result in NALE.

“The ruling provides some wriggle room for SMSF members to provide services to their own SMSF using their own business skills and experience and they don’t need to charge their fund for that service.

“For example, a financial planner who has an SMSF can use their skills and knowledge in formulating an investment strategy for their fund and this service can be provided to their fund without charge.

“Even if they use their business assets in a minor or infrequent way, it will still not be classified as a service they need to charge their SMSF for.

“But the ruling does draw the line at services that can only be provided if the SMSF member holds a particular licence or qualification, or the service is covered by an insurance policy relating to their business”,

“In these instances, the SMSF member is required to charge their fund an arm’s length fee for the service provided, or risk some or all of the fund’s income being taxed as NALI,” Burgess says.

Source: SMSF Association

Trustees more open to advice

The latest sector research has shown the economic instability resulting from the COVID-19 pandemic has seen a shift in attitudes toward financial advice, with SMSF trustees now more open to receiving this type of guidance.

The “Vanguard/Investment Trends 2021 SMSF Investor Report” indicated this change in sentiment toward financial advice had mainly come from SMSF trustees defined as validators – individuals who would like a second opinion to affirm their decisions.

To this end, the study showed 56 per cent of this cohort was now open to receiving financial advice as opposed to 49 per cent expressing this opinion in 2020 and 47 per cent doing the same in 2019.

However, despite an increased interest in seeking financial advice, the report revealed the number of SMSFs using a financial planner fell from 185,000 in 2020 to 160,000 in 2021. Further, funds not currently using a qualified financial planner increased from 220,000 in 2020 to 245,000 in 2021.

SMSFs not engaging the services of a financial adviser nevertheless did identify some specific areas they would like to receive advice on.

“What really comes out strongly are SMSF pension strategies (100,000 funds) …inheritance and estate planning (75,000 funds) and contribution strategies (75,000 funds),” Investment Trends head of research Irene Guiamatsia said during a presentation of the report today.

This finding reflects the renewed priority given to these issues, with around 65,000, 58,000 and 48,000 funds respectively nominating these areas associated with advice gaps in 2020.

“Opportunities remain for advisers to demonstrate the value they can offer SMSFs, especially in areas such as SMSF pension and contribution strategies, as well as estate planning, where there exists an advice gap,” Vanguard Australia head of corporate affairs Robin Bowerman said.

The report was compiled from the results of an online survey conducted between March and April that garnered responses from 2523 trustees.

Source: smsmagazine.com.au

Can an SMSF own employee shares?

Employers are turning to alternative methods of rewarding employees as wage freezes become commonplace during the pandemic. With record-low wages growth of 1.4 per cent over the last year, companies are offering employee share schemes (ESS) as an incentive where they struggle to pay high salaries.

The question is: can an SMSF own employee shares?

Essentially, a member can transfer an asset owned personally into an SMSF through an in-specie contribution. The limiting factors include the exceptions outlined in section 66 SIS – acquisition of assets from a related party, the contribution caps and non-arm’s length income (NALI).

Acquisition of assets from a related party

In general, the transfer of share or options from an employee participating in an ESS is an acquisition of assets from a related party. The reason is that the employee is typically a related party to the fund.

The fund must acquire the assets at market value, either in a listed security or in a related entity, with the maximum investment as a percentage of total fund assets shown below:

Asset Type

Max SMSF Investment

Listed Security

100%

Unrelated Shares/Units

0%

Related Shares/Units

5%

To be clear, an SMSF cannot acquire ESS shares in an unrelated private company and is limited to a maximum investment of 5 per cent of the total value of fund assets in a related party entity ESS under the in-house asset limits.

Regardless of the discount or method applied to price the ESS for the employees, the acquisition price from the SMSF’s point of view is the market value when the shares are transferred into the fund.

While it is easy to determine the market value of shares listed on the ASX, the market value of shares in a related, unlisted entity is complex and requires more documentation.

Suppose the shares or options are transferred in for no consideration or less than market value? Where the member takes up the difference as a contribution, the shares are acquired at market value, and section 66 SIS will be satisfied.

Contribution caps

The ATO expects SMSF trustees to know which types of contributions breach the super laws. Returning a contribution is only allowed where the trustee cannot accept the amount under SIS or where the return is authorised by the principles of restitution for mistake — not where the member has exceeded their caps or simply changed their mind.

By way of example, a member is 45 years of age and received $25,000 in employer contributions during the year. She is offered an ESS from her employer, a publicly listed company, with a total market value of $35,000. However, her total superannuation balance (TSB) is above $1.6 million as of 30 June the previous year.

As a result, the member cannot make any more contributions because the concessional cap has been reached, and the non-concessional contributions cap is nil.

In this case, however, the member makes the $35,000 non-concessional in-specie contribution to the fund of the ESS on 2 June 2020.

However, it is not until 12 months later, during the audit, that the trustee is made aware that the member breached its contribution limits.

The ATO’s position is straightforward. A reasonable trustee, acting with the level of care, skill and diligence required of a trustee of a complying fund, would have checked the fund’s affairs.

Because the member is also a trustee, the fund effectively becomes aware of whether it can accept the contribution or not when it happened.

There is a strict process to follow as excess contributions cannot be refunded immediately. Technically, this is illegal early access: the member must wait for the ATO to issue an excess contributions determination notice before returning the extra amount.

Ownership of ESS

Some ESS include terms and conditions such that only the employee can own the shares. Others have the requirement that the employer must approve any transfer of the shares to an associate, related party or entity.

Under these circumstances, it may be difficult for the fund to own the shares beneficially.

Depending on the details of the offer, the fund may not be able to legally hold the shares, a potential breach of r4.09A SIS.

Remember, too, that an asset is generally considered a contribution when the SMSF gets legal ownership of the asset.

NALI

There may be other circumstances that contribute to the transfer of the ESS into the fund not being on an arm’s length basis.

The offer could include more favourable terms such as an interest-free loan from the employer to purchase the shares or receiving a higher dividend instead of market remuneration.

The SIS rules state that where parties are not dealing at arm’s length and the terms are more favourable to the SMSF, there will be no breach of s109 SIS. 

However, the NALI provisions then apply, which remove the fund’s tax concessions where the SMSF and other parties are not dealing at arm’s length in relation to a scheme.  

Where income is deemed to be NALI, all of the income generated from that asset will be taxed at the top marginal tax rate of 47 per cent, even if the member is in the pension phase.   

Conclusion

There is a lot to consider when a member transfers ESS into an SMSF by way of an in-specie contribution. The trustee must ensure the transaction meets the requirements of s66 SIS by assessing the facts and circumstances of each situation.

The federal government has recently made ESS more attractive by removing the cessation of employment as a taxing point in the May 2021 budget. While the proposal is awaiting royal assent, this advantageous change may see more ESS transferred into SMSFs by members.

SMSF professionals need to pay close attention to the finer details of the ESS offer to ensure any in-specie contributions are in line with SIS, which will then allow an SMSF to own employee shares.

Shelley Banton, head of education, ASF Audits
Source: SMSF Adviser 

SMSF scams are on the rise: Here’s how to fight back

The growing prominence of SMSFs has made them a ripe target for scammers.

More and more Australians are opting to forge their own future with a self-managed super fund.

According to the Australian Taxation Office, self-managed super funds (SMSFs) have continued to grow in value and popularity in recent years. Their latest numbers indicate that there are 593,000 SMSFs in Australia, accounting for approximately $733 billion in total assets.

“SMSFs had assets of over $1.3 million each on average in 2018–19, up by 5 per cent from the previous year and up by 22 per cent over five years,” the ATO said.

One report by IBISWorld suggested that SMSF assets made up almost a quarter — 24.7 per cent — of total super assets as of March 2020.

However, with that popularity has come new hazards for investors.

ASIC issued a fresh warning for SMSF scams back in May, recommending that investors undertake independent enquiries to ensure that the scheme is legitimate if they are contacted by a person or company encouraging them to open an SMSF and move funds.

“Investing in financial products always involves some level of risk, but it is also important to check that investment opportunities are legitimate before investing,” they said.

Speaking to sister title nestegg, Marisa Broome, the chair of the Financial Planning Association, reiterated the classic phrase: if it looks too good to be true, it probably isn’t.

“In a record-low interest rate and post-COVID environment, investors need to remain vigilant and not be tempted by supposedly attractive but questionable offers,” she said.

Ms Broome cautioned that while self-managed superannuation funds can be “a key strategic structural option” for many investors, they are “not for everyone”. 

“They are complex, need active involvement by the members, and can be costly — both in actual fees and lost investment earnings if not managed well,” she said.

In her experience as a financial planner, Ms Broome said she has seen many examples of poor investments where investors are encouraged to set up costly structures within their SMSF to borrow funds. 

These funds are then used to buy property “that is often overpriced, poorly located and possibly may result in a large commission being paid to the ‘introducer’ that is not disclosed to the client”.

Ms Broome said that while ASIC does put out alerts on investment scams, “many of these schemes do fly under the radar”.

“Some may even technically meet all the requirements of the law, but what they are actually selling is an investment that will never provide the promised returns,” she said.

“Seeking advice from a qualified financial planner will help in many areas, including to help you differentiate between a scam and a legitimate offer.”

Source: SMSF Adviser